Question
Asked Sep 10, 2019
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You buy a mutual fund for $1,000. It annually distributes $60 for eight years, after which you sell the shares for $900. What is the annualized return on your investment?

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Expert Answer

Step 1

Expected rate of return can be described as the total profit or loss on a particular investment over a set period of time. Expected rate of return is generally stated as a percentage in relation to primary cost of investment.

It is given that,

Initial cash outflow is $1,000.

Annual cash inflow is $60.

Cash inflow at the end of year 8 is $900.

Step 2

The formula to calculate present value will be helpful to calculate the expected interest rate.

The below expression can be used to calculate expected interest rate:

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C+FC C C + C + C + PV + 7 (1+((1+ Here PV is present value. C is cash inflow FC is final cash inflow (1+ij (1+j6 (1+ 5 ( 2 3 8 1+i)(1+ (1+) (1 i)

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Step 3

Substitute $60 for C and $900 for FC...

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$60 $60 2 $60 $60 $60 + 4 $60 6 $60 $60+$900 7 (1+) PV 5 (+(1+(1+(1+1 (1+j (1+j (L+i) 3 (1+i) (1+f)(1+(+i) (1+i)

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